How does the Emissions Trading Scheme impact on electricity prices?

DEUN

How does the Emissions Trading Scheme impact on electricity prices?

The Emissions Trading Scheme (ETS) may only seem to be part of the climate change debate, but it has the potential to have an impact on electricity prices, particularly for households.

But firstly, a bit of background. The ETS, more comprehensiveley known as the Climate Change Response (Moderated Emissions Trading) Amendment Bill, was passed by Parliament on November 25 2009, replacing the previous government's policy. It specifies which sectors of the economy will pay for New Zealand's international obligations to reduce greenhouse emissions by 2020.

So what does the ETS mean for households?

Essentially, electricity prices will rise by1c/kWh from July 2010 and by another cent in Jan 2013. At the same time, petrol prices will rise by 3.5c/litre, then by 7c from 2013. This is a serious concern for low income households, as Jeanette Fitzsimons has pointed out.

“Power and fuel are a much higher proportion of family income for those on low incomes than for high earners. (Lower income households are) more likely, statistically, to live in cold damp houses on the edge of cities where the only way to get to work is my car and the only affordable car is a gas guzzler,” she said earlier this year.

Another key point in the policy is that 8000 more low-income homes will be insulated – an increase of 7% on the existing warm homes programme.

Is this a good deal?

While the policy shows attempts to find a balance between consideration for climate change and the interests of the economy, any price increase is not a good deal for households who are already struggling to pay their electricity bills.

Over time, the price rises have the potential to exacerbate energy poverty for those households that cannot access subsidized insulation, or afford to buy more energy-efficient appliances.

It is important to remember that the emissions price, though significant, is only one of several factors that are driving electricity price rises. Nobody likes price rises, but price rises caused by building expensive new power stations are much larger than the rise due to the ETS. In recent years, electricity prices have risen by almost 1c/kWh every year.

Also, the insulation aspect of the policy isn’t enough. At least a million homes are in need of insulation: the 8000 represents less than 1% of those homes.

Is this a fair deal?

Consider these points:

• Householders will pay for half the emissions liability over the first five years, while generating only a fifth of the emissions.

• Large industrial users will pay 1% of the emissions liability while causing 15% of the emissions. Their demand will grow faster as a result of their emissions pricing subsidy.

• Electricity price rises from the ETS will create windfall profits of $1.8 billion to renewable energy generators in its first five years.

The future: fly now pay later

The new ETS policy delays the first price rises by six months; it cuts price rises in half in the first years, and caps the emissions price. This all amounts to a three-year ETS price holiday for household energy users.

This will ease the pain in the short term, but it will also make it less economical for households to invest in energy-saving insulation and appliances.

Then once the emissions price subsidies end, householders will face higher energy bills forever - or until they are forced, or helped, to invest in energy saving.

The Sustainability Council estimates that over the next 80 years, the ETS will make householders and small businesses subsidise large industries and agriculture by about $100 billion! To give you a perspective on this figure, $100 billion is approximately equal to eight years of total government spending on health.

“This is equivalent to putting the bulk of the Kyoto bill on the credit card,” said Simon Terry, Executive Director of the Sustainabilty Council.

What should be done?

Energy costs will inevitably rise as gas and oil become scarce, and as world emissions prices increase. These factors will increase windfall profits to renewable electricity generators - an inevitable result of New Zealand’s electricity pricing system.

These windfall profits should be dedicated, in full, to assisting householders and businesses to invest in energy-saving insulation and equipment.It would make New Zealand's houses healthier, and businesses more profitable.

Particular consideration and assistance should be given to those households most affected by energy poverty; they should receive direct assistance with their energy bills, home insulation and energy efficiency upgrades.

A fairer pricing system would reduce the windfall profits. Best would be "progressive pricing", where all consumers get a block of electricity at a reduced price, and pay a higher price for the rest of their electricity.